February 8

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How to Plan to Fail

Family Update

 

This week was the first time my kids had ever seen frost. We live on several acres and the grass was white as far as you could see. It’s probably the closest thing they will ever see as snow down here.

 

Also, because of the cold, I had to bring my orchid collection inside. I’m up to 150 plants so it was quite a scene. The whole house smelled amazing.

 

This is also peak blooming season for orchids. I’m going to Venice this weekend for an annual orchid show and sale. I’m adding more and more rare orchids to my collection.

 

 

Samantha and Charlie needed help.  As they were nearing retirement they realized that it was time to really put together a financial plan.

 

It seemed like there was a bevy of choices to choose from.  There were financial advisors everywhere.  They didn’t feel it appropriate to ask around the neighborhood.  “Peoples’ finances should be private,” Samatha always said. “That stuff is nobody’s business but their own.”

 

So they decided to walk into a large bank that had branches around the country.  As they entered the lobby they marveled at the marble columns and windows with views of the skyline.  The waiting room was gorgeous.  Leather sofas and other high-end furnishings left an imprint on Samatha and Charlie.

 

After a few minutes, they were ushered into a conference room with a financial advisor, Joe.

 

“Let’s start with all of your financial information,” Joe said.

 

Samantha and Charlie poured out their financial hearts.

 

Samanta bemoaned, “We feel so stupid.  We know we need to understand this more.  We just never got around to educating ourselves.”

 

“Don’t worry,” replied Joe. “Most people feel the same way.  You are in the right place.”

 

After about an hour, Joe set up another appointment where he planned on revealing Samantha and Charlie’s financial plan.

 

A week later they found themselves back in the conference room.

 

“I’ve done quite a bit of work on this,” Joe said.  “Let’s take a look.”

 

He slammed down a binder about an inch thick onto the table.  He began going through the details.  Page after page he pointed at colorful graphs and charts.

 

“As you can see,” Joe said. “With your current financial positions and assets, there is an 80% chance you have enough money to last into your eighties. It is closer to 70% if you live into your nineties.”

 

Samanta shot a look at Charlie. She was obviously upset.

 

After signing over the money, the ride home was somber. Samatha was just sick.

 

“I knew it.  I’ve always told you we didn’t save enough.  We have longevity in our families.  You saw that plan.  It was so thorough, and Joe seems so smart. Going forward we won’t spend any money unless we absolutely have to.” Samantha said.

 

“Honestly I didn’t understand a word he said,” Charlie admitted.  “Let’s study that plan tonight after dinner.”

 

That night as they flipped through the pages of the plan, Charlie said, “I can’t make heads or tails of this. There are sixty-five pages to this thing.”

 

So Samantha and Joe spend their remaining years living like they were broke, eating Dinty Moore stew from a can and only shopping at the Dollar Store.  They only dipped into their retirement accounts in emergencies.  They died with far more money than ever.

 

—————————————

 

Ten of thousands of people are going through similar experiences right now.  It doesn’t have to be this way.

 

Let’s look at all the assumptions most planning software makes.

 

Assumption #1

 

More pages to the plan mean a better plan.

 

Probably ten times or more, during my career, I’ve been trained on various financial planning software.  The more I learn the less I like them.  Complexity doesn’t necessarily mean it’s better.  I’m at a point now where my financial plans consist of are two pages.  It works incredibly well and it is as accurate (if not more accurate) than these massive binders.

 

As an added bonus with my plans:  You actually understand it!

 

Assumption #2

 

Inflation will run at 3% on average over any meaningful time period.  Inflation is obviously a hot topic right now, but let’s take a look at why inflation doesn’t hurt as much as you think over the long term.

 

Most software doesn’t take a very important variable into their calculations.  People spend less money as they get older.  You buy fewer cars.  Mortgages start getting paid off.  You buy fewer clothes.  You go out to dinner less.  When you are eighty-five you will have a very limited interest in traveling to the Far East.

 

The Center for Retirement Research found that average spending by households headed by 55 to 64 year-olds was $65,000 in 2017.  It dropped to $55,000 between the ages of 65 and 74, at which point it fell to $42,000.

 

Another important assumption these programs miss is Social Security increases by the rate of inflation. This year everyone got nearly a 6% raise to their check due to high inflation.

 

So this single missed assumption completely throws off the rest of the numbers.  When this software has one variable which is incorrect, every other conclusion is wrong.

 

Assumption #3

 

The stock market will not necessarily perform as it has in the past.

 

The stock market has returned around 10% over any meaningful time period.  So if between now and the end of your life the stock market doesn’t return around 10% it would be absolutely unprecedented.

 

If the financial planning software assumes the stock market will have an average return of 5%, every conclusion is wrong.  The rest of all the colorful charts and graphs are worthless.

 

Assumption #4

 

Life expectancy.  This concept that your assets will continually drawdown is incorrect.  These programs are missing a huge variable.  If you only take out the money that the money is making, you will never run out of money.

 

With my clients, I send 5% of their account value each year.  If you take out the 5% it doesn’t matter how long you live.  You still have the principal. If you die with less than what you started with it would be unprecedented.

 

I can’t emphasize this enough.  If you don’t understand your plan, you are going to worry unnecessarily.  Don’t make this more complicated than it is.

 

Be Blessed,

 

Dave

 

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